What is a standing charge?
The standing charge is a fixed amount that you pay on your energy bill every day, regardless of your usage.
The charge covers those ‘non-energy’ costs that suppliers have to pay on behalf of customers. For business customers, these largely come from the costs of using and maintaining the energy networks.
This includes but is not limited to; maintaining and upgrading the infrastructure that delivers electricity and gas to your business and the costs of collecting and processing meter readings.
Our business customers’ standing charge also includes our labour and operational costs, which like all businesses are driven by a number of economic factors.
Standing charges are applied to both electricity and gas tariffs. They can also vary by the region of the country you live in and the energy consumption band that your business falls into.
Why are standing charges increasing?
Network charging reforms
The way we all pay for using the network has been under reform by the energy regulator for a number of years now.
Recent industry changes have meant a portion of costs that were previously variable, and often included in your unit rates, are now moving to fixed charges and collected via standing charges.
The regulator’s rationale for these changes relate to fairness – so we all contribute to network costs in a way deemed proportionate by Ofgem’s new fixed charging bands.
We have summarised the main changes below.
Distribution network charges
From April 2022, the first of many decisions came into effect – moving distribution network residual charges to a fixed cost. Distribution costs cover the charges of carrying the electricity from the transmission grid to your business supply point.
In simple terms, this change means where previously this portion of the network costs were included in your unit rates, Ofgem has decided this should move to a fixed charge and collected via standing charges.
Transmission network charges
These network charges relate to the costs of maintaining and expanding the high voltage network infrastructure. Ofgem has decided that the transmission charges should also move to a fixed cost. This will take effect from April 2023.
Again, fairness is at the core of this decision from the regulator. The previous method for calculating these charges involved National Grid confirming the three half-hourly periods where demand was highest across the winter months. These three days would then be used to calculate your business’ charges, depending on your usage on those three days. With some businesses able to predict these days in advance, they have been able to avoid a large portion of these charges.
Balancing system costs
Suppliers pay balancing system charges, which are the costs the system operator (National Grid) incurs with the day-to-day operation of balancing the grid (matching energy supply and demand). The existing charge is variable and can therefore be volatile, especially at times when it is challenging to balance the amount of energy needed with that being generated.
From April 2023, Ofgem has decided that this cost should move to a fixed charge. They have also decided that the larger generators will no longer pay these balancing charges. This means these costs will be charged solely to end consumers, like your business, from April 2023.
Inflation, labour and increased material costs
Network costs have been increasing because of the urgent need to upgrade and expand our energy infrastructure to support the country’s net-zero targets. This has recently been compounded by inflationary pressures with rising costs for materials and wages.
